On June 10, 2015, with the approval of the Board of Directors of the Company, Mr. Watts exchanged all rights he had to the 8,188 shares of Series A 7% Convertible Voting Preferred Stock (which were required to have a face value of $3,275,200) pursuant to the terms of the Exchange Agreement, and accrued and unpaid dividends which would have been due thereunder, assuming such Series A 7% Convertible Voting Preferred Stock was correctly designated and issued at the time of the Exchange Agreement, totaling, $327,879, into 32 Units (as defined below) which the Company is in the process of offering in a private offering to ‘accredited investors’. Each “Unit” consists of (a) 25,000 shares of the Company’s restricted common stock; and (b) Convertible Promissory Notes with a face amount of $100,000 (“Convertible Notes”). The Convertible Notes contain a 25% original issue discount, and as such the total amount of the purchase price of each Unit attributable to the Convertible Notes which make up each Unit is $75,000 and the total amount of the purchase price of each Unit attributable to the Offering Shares is $25,000.
Each Convertible Note has a maturity date of three years from its issuance date, is convertible into common stock of the Company at any time at the option of the holder at a conversion price of $4 per share, and was automatically convertible into shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”) of the Company upon designation of such Series B Convertible Preferred Stock with the Secretary of State of Nevada, which designation occurred on September 28, 2015. The Convertible Notes accrued interest, quarterly in arrears, which accrued interest is added to the principal balance of the Convertible Notes until the date the Convertible Notes were converted into Series B Preferred Stock. The interest rate of the Convertible Notes fluctuated each calendar quarter, based on an annualized percentage interest rate equal to the average of the closing spot prices for West Texas Intermediate crude oil on each trading day during the immediately prior calendar quarter divided by ten, plus two (the “WTI Interest Rate”). For example, if the average quarterly closing spot Price was $60 for the prior quarter, the applicable interest rate for the next quarter would be 8% per annum ($60 / 10 = 6 + 2 = 8%). Notwithstanding the above, in the event that the average quarterly closing spot price is $40 or less, the interest rate for the applicable following quarter is 0%. Any amounts not paid under the Convertible Notes when due accrue interest at the rate of 12% per annum until paid in full.
Automatically, upon the designation of the Series B Preferred Stock with the Secretary of State of Nevada, all outstanding principal and accrued interest on the Convertible Notes was converted into shares of the Series B Preferred Stock, based on the face value of such Series B Preferred Stock, $1,000 per share, with any remaining fractional amount payable in cash.
The Series B Preferred Stock have a face value of $1,000, and accrue a quarterly dividend (based on each calendar quarter), beginning on the first day of the first full month following the initial issuance date of the Series B Preferred Stock, equal to the WTI Interest Rate multiplied by the face value. Until the end of the third calendar quarter following the initial issuance date (the “Accrual Period”), dividends accrue and are paid in additional shares of Series B Preferred Stock based on the face value of the Series B Preferred Stock (provided that any dividends representing less than the face value accrue until the next period (if they then total the face value of one share of Series B Preferred Stock) or the end of the Accrual Period when they are payable in cash). Any dividends not paid when due accrue interest at the rate of 12% per annum until paid in full.
The Series B Preferred Stock has the right to participate in dividends and other non-stock distributions of the Company as if such Series B Preferred Stock had previously been converted into common stock. The Series B Preferred Stock contains a liquidation preference equal to its face value, which takes priority over the securities of the Company other than, amounts owed by the Company to Shadow Tree Capital Management, LLC, and other lenders under the Company’s senior credit facility, as well as any future debt used to refinance, repay or supplement the senior credit facility, capital leases, senior debt in place as of the original issuance date of the Series B Preferred Stock and any other securities which the Company may determine to provide first priority interests to in the event of a liquidation of the Company, provided that the Series B Preferred Stock shall always have a liquidation preference over the common stock.
Each Series B Preferred Stock share is convertible, at any time, at the option of the holder, into 250 shares of common stock, and all accrued and unpaid dividends are convertible into common stock of the Company at the option of the holder at any time, at the rate of $4 per share. Each Series B Preferred Stock share votes together with the common stock on all shareholder matters, and not as a separate class, and has the right to vote 250 voting shares on all shareholder matters. The Series B Preferred Stock and any and all accrued and unpaid dividends thereon also automatically convert, upon the Company’s common stock (as adjusted for stock splits and similar events) closing at or above $7 per share for a period of at least thirty consecutive trading days, into shares of common stock in an amount equal to (i) the number of shares of Series B Preferred Stock held by each holder multiplied by the face value of the Series B Preferred Stock ($1,000 per share), plus (ii) any and all accrued dividends, divided by the conversion price ($4 per share). The Series B Preferred Stock contains no preemptive rights. The Series B Preferred Stock has no redemption rights, provided the Company is able, pursuant to the terms of the Series B Preferred Stock to negotiate, from time to time, mutually agreeable redemption terms with any or all of the Series B Preferred Stock holders (which terms and conditions need not be consistent from holder to holder).
As such, Mr. Watts received an aggregate of 800,000 shares of common stock and a Convertible Promissory Note with an aggregate principal amount of $3.2 million and a maturity date of June 10, 2018.
On July 21, 2015, Mr. Watts and the Company agreed in principle to reduce the number of total Units due to Mr. Watts to 30 units. On September 21, 2015, Mr. Watts and the Company entered into a First Amendment to Exchange Agreement, which amended the Exchange Agreement dated June 10, 2015. The First Amendment formally reduced the total Units due to Mr. Watts to 30 units, and as such, Mr. Watts received Convertible Promissory Notes with a principal amount of $3 million and 750,000 shares of common stock in connection with the exchange.
In connection with the September 28, 2015, designation of the Company’s Series B Convertible Preferred Stock, all outstanding Convertible Promissory Notes automatically converted into shares of Series B Convertible Preferred Stock. In connection with such automatic conversion, the $3 million in Convertible Notes held by Mr. Watts automatically converted into an aggregate of 3,000 shares of Series B Convertible Preferred Stock.
In November 2014, Pasquale V. Scaturro, the Company’s former Chief Executive Officer and Kent P. Watts, entered into a stock purchase agreement, which was amended in December 2014, at which time certain of the adult children of Mr. Watts became party to the agreement. Pursuant to the agreement, Mr. Watts and his children agreed to sell Mr. Scaturro the outstanding capital stock of a company which they owned which is located in Namibia which owns real estate, in consideration for 475,000 shares of common stock held by Mr. Scaturro (deliverable in tranches between December 2014 and April 2015, of which an aggregate of 75,000 shares had been delivered as of the Record Date) to be transferred to Mr. Watts’ children and a promissory note in the amount of $475,000 payable to Mr. Watts. Additionally, Mr. Scaturro also entered into a lock-up agreement, whereby he agreed to sell a maximum of 500 shares of the Company’s common stock which he holds or may hold in the future, per day, until the listing by the Company on a national exchange or NASDAQ, and thereafter to sell 5% of the ten day moving volume weighted average of shares per day, during the 24 months following the date of the December agreement. Subsequently, Kent P. Watts assigned his rights under the lock-up agreement to the Company and a lawsuit was filed by the Company seeking damages for Mr. Scaturro’s breach of contract. In July 2015, the parties entered into a settlement agreement whereby Mr. Scaturro agreed to transfer an aggregate of 2,237,500 shares of the Company’s common stock to Mr. Watts, and an aggregate of 162,500 shares of common stock to two children of Mr. Watts (which shares Mr. Watts is not deemed to beneficially own); Mr. Scaturro retained 307,058 shares (the “Remaining Shares”), all interests held by Mr. Watts’ children in the Namibia company were transferred to Mr. Scaturro, and the consulting agreement which was previously in place between the Company and Mr. Scaturro was terminated. The parties also agreed to dismiss the lawsuit and cross and counter claims with prejudice and released each other from outstanding claims and causes of actions. Of the 2,237,500 shares of common stock received by Mr. Watts, a total of 300,000 shares will be transferred to Mr. Watts’ legal counsel as part of a contingent settlement of amounts owed to such legal counsel and are not included in his ownership as described herein.
On July 31, 2015, the Company’s Board of Directors issued Mr. Watts 3,398 shares of common stock in consideration for services provided to the Board of Directors.
In July, August and September 2015, Mr. Watts sold an aggregate of 1,396,665 shares of restricted common stock which he held to thirteen purchasers in private transactions for $0.50 per share ($698,333 in aggregate), including 333,332 shares sold to Client Summers who subsequently became a member of the Board of Directors of the Company and who is currently deceased.
On or around August 25, 2015, Mr. Watts entered into a voting agreement in favor of S. Chris Herndon, a member of the Board of Directors of the Company. Pursuant to the voting agreement, Mr. Watts provided Mr. Herndon a voting proxy to vote all of the shares of common stock which Mr. Watts owns or may acquire in the future, to vote to elect or remove (as applicable) 66.6% of members of the Company’s Board of Directors on any stockholder vote (i.e., 2 out of 3 directors). The voting agreement also limits the ability of Mr. Watts to sell the shares subject to the voting agreement, absent the approval of Mr. Herndon. The voting agreement was to become effective, only if Mr. Watts had sold $1 million in securities in private transactions on similar terms as described above before September 21, 2015 and was to remain effective from such date, if ever, until the earlier of: (a) August 19, 2017; and (b) the due date of a certain convertible note which a company affiliated with Mr. Herndon (Duma Holdings, LLC) may choose to purchase from the Company in the future as described in greater detail in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on July 31, 2015 (as applicable, the “Termination Date”).
As a result of Mr. Watts not selling $1 million in securities in private transactions on similar terms as described above before September 21, 2015, the voting agreements were never effective and expired; provided that on November 16, 2015, the parties entered into a First Amendment to Voting Agreements to remove the prior condition to effectiveness regarding the required sale of $1 million in securities before September 21, 2015, and as a result the voting agreements are currently in full force and effect pursuant and will remain in effect until the Termination Date. As a result of the voting agreements Mr. Herndon has the right to appoint 66.6% of the members of the Company’s Board of Directors until the Termination Date.
On September 14, 2015, Mr. Watts subscribed for $350,000 in Convertible Subordinated Promissory Notes and on September 17, 2015 he subscribed or an additional $166,667 in Convertible Promissory Notes (collectively, the “Watts Notes”). The Watts Notes are due two years from their issuance date, accrue interest which is payable quarterly in arrears, at either a cash interest rate (equal to the WTI Rate described below) or a stock interest rate (12% per annum)(at the option of the holder at the beginning of each quarter), provided no principal or interest on the Watts Notes can be paid in cash until all amounts owed by the Company to its senior lender are paid in full. In the event the stock interest rate is chosen by Mr. Watts, restricted shares of common stock equal to the total accrued dividend divided by the average of the closing sales prices of the Company’s common stock for the applicable quarter are required to be issued in satisfaction of amounts owed on a quarterly basis. In the event the cash interest rate is chosen, interest accrues until converted into common stock (as discussed below) or until the Company is able to pay such accrued interest in cash pursuant to the terms of the Watts Notes. The “WTI Rate” equals an annualized percentage interest rate equal to the average of the closing spot prices for West Texas Intermediate crude oil on each trading day during the immediately prior calendar quarter divided by ten, plus two (the “WTI Interest Rate”). For example, if the average quarterly closing spot Price was $60 for the prior quarter, the applicable interest rate for the next quarter would be 8% per annum ($60 / 10 = 6 + 2 = 8%). Notwithstanding the above, in the event that the average quarterly closing spot price is $40 or less, the WTI Rate for the applicable following quarter is 0%. All principal and accrued interest on the Watts Notes is convertible into common stock at a conversion price of $0.75 per share at any time. Additionally, the Company may force the conversion of the Watts Notes into common stock in the event the trading price of the Company’s common stock is equal to at least $5.00 per share for at least 20 out of any 30 consecutive trading days. Any shares of common stock issuable upon conversion of the Watts Notes are subject to a lock-up whereby no shares of common stock can be sold until January 1, 2016, and no more than 2,500 shares of common stock can be sold per day thereafter until the Company’s common stock is listed on the NASDAQ or NYSE market or the trading volume of the Company’s common stock is in excess of 100,000 shares per day. The Watts Notes have standard and customary events of default.
On September 30, 2015, Mr. Watts was due 3,210 shares of common stock in consideration for accrued interest on the Watts Notes.